Student Research Case Studies in Agribusiness California Polytechnic State University, San Luis Obispo Year 2016 Target: The Epic Search for Equilibrium Delaney Ainsworth∗ Jonathan Galvezy Austin Ketchersidz Carson Stone∗∗ ∗Agribusiness, Cal Poly, San Luis Obispo yAgribusiness, Cal Poly, San Luis Obisp zAgribusiness, Cal Poly, San Luis Obisp ∗∗Agribusiness, Cal Poly, San Luis Obisp This paper is posted at DigitalCommons@CalPoly. https://digitalcommons.calpoly.edu/agb cs/20 Target: The Epic Search for Equilibrium By: Delaney Ainsworth, Jonathan Galvez, Austin Ketchersid, and Carson Stone 1 Table of Contents Introduction…………………………………………………………………………………………………………2 Food Retail Overview………………………………………………………………………………………………….………....5 Company Background………………………………………………………………………………………………………….7 Current Market Situation & Competition…………………………………………………………………………………………...…………...9 Possible Opportunities……………………………………………………………………………………………………..12 Appendix..………………………………………………………………………………………………………….17 Bibliography……………………………………………………………………………………………………….20 2 Introduction In March 6th, 2008, Gregg Steinhafel, the CEO of Target Corporation, unveiled the new attachment to grocery: PFresh. Taking up about 1,500 square feet, PFresh was designed to add several extra grocery components to the existing discount store, including an expanded fresh produce, dairy, and meat section. The PFresh stores hold 50 to 200 percent more food products and are intended to be more consumer friendly. Apparently the consumers loved it, because it caused earnings to increase 18.6 percent in August 2009. Although successful, Target’s PFresh visions came with a steep price, investing $1 billion in the widespread rollout. Nonetheless, Gregg Steinhafel was extremely pleased with his announcement. (“Target to Add ‘PFresh’ Grocery Concept at 350 Stores”) Although the opening launch of PFresh was groundbreaking, it shouldn't have hit anyone by surprise. Target had been planning this for quite some time, with building their own food distribution center specially designed to store perishable items like dairy, meat, and produce. In addition, space in the discount stores was made from the closing of the garden section. Target’s garden business wasn’t terribly profitable due to its strong competitors, Walmart and Home Depot, and due to its lack of knowledge in the business of gardening. All in all, it was short lived. Lastly, Super Targets have already implemented a PFresh section in their massive 220,000 square foot stores, which tells us their distribution centers have potentially geared up for this transition already. Let’s take a step back to briefly discuss the groundbreaking SuperTarget. In 1995, Gregg Steinhafel announced the first SuperTarget, making this Target’s first time including PFresh items into their stores. The mission behind the addition of a massive grocery section was to supply guests with the convenience of a one-stop shopping experience. Once again, Steinhafel was pleased with his unraveling. Fastforwarding to January 13th, 2011, Gregg Steinhafel introduces yet another billion dollar idea: Target’s first ever international expansion into Canada. Steinhafel acquired 133 stores previously belonging to Zellars, a Canadian chain retailer, for $1.8 billion, which at the time seemed brilliant as it gave Target the opportunity to not build any stores from the ground up. On the surface, this was a deal of a lifetime. However, after digging a bit deeper, Gregg came to realize the Canadian Targets were infested with problems. For starters, most Zellers stores were quite dilapidated, and were in areas not frequented by the middle class consumers Target attracted. Secondly, the distribution and inventory planning became a logistical nightmare. Opening 133 stores in a small period of time is a recipe for disaster, and disaster it was. Stock outs were constant, and shoppers became impatient. Produce, if available, would arrive brown in color and unappealing to the guest, leading to a poorly viewed PFresh. Last but 3 not least, Target offered Canadian products, however Canadians demanded U.S. products, something Target was not expecting. Canadians already had Walmart surrounding them with lower prices, so they didn’t want to be bombarded with any more cheap Canadian products. Overall, the store’s botched expansion was a “spectacular failure”. This time around, Gregg Steinhafel, absolutely appalled and speechless, was not terribly pleased with his plans. The Canadian collapse led to his resignation in 2014. With Steinhafel’s resignation arose a man by the name of Brian Cornell, a former CEO of Sam’s Club and Michael’s. Although Target Corporation was skeptical about hiring an outside leader for the first time, Cornell had a certain sparkle to him, a new-age way of thinking that symbolized a new beginning for Target; a chance to leave the Canadian misfortunes behind and start fresh. The first thing on Cornell’s to-do list: get rid of all Canadian Targets. In his words, “Our Target Canada business had reached the point where, without additional funding, it could not continue to meet its liabilities. Simply put, we were losing money every day,” Cornell said in a blog post. (Wahba) After making the first step into the right direction, Cornell had quite a bit on his mind. What should his next move be? Knowing that the PFresh expansion wasn’t cheap and the grocery department as a whole wasn’t exceeding expectations, he must make some changes to improve sales in the grocery department. Brian doesn't want to make the same mistakes as Steinhafel did in Canada, so what can he do to avoid failure and improve sales in grocery? Brian Cornell Brian Cornell was born in Queens, New York City, where he was brought up predominantly by his grandparents. His father passed away when he was 6, and his mother was living on welfare due to her severe heart disease. As a teenager, he helped pay his mother’s bills through working at entry level positions. His adolescent life was in no way glamorous, however even in his tough upbringings, he still had a strong self-motivation to get a degree. Cornell graduated from the University of California, Los Angeles in 1981 where he got his bachelor's degree, and continued to go to school to graduate from the Executive Program at the UCLA Anderson School of Management. Even with humble upbringings, he began making a name for himself. Cornell worked his way up to a leading position as the Chief Marketing Officer and the Executive Vice President of Safeway Inc. from 2004 to 2007, but he didn’t stop there. He held several escalating leadership positions at respectable companies, including 3 CEO positions at Michaels from 2007 to 2009, Sam's Club from 2009 to 2012, and PepsiCo Americas Foods, a subsidiary of Pepsico, from 2012 to 2014. When Steinhafel stepped down in 2014, Cornell saw an opportunity. As chair of the 4 board Roxanne Austin reported, "As we seek to aggressively move Target forward and establish the company as a top omnichannel retailer, we focused on identifying an extraordinary leader who could bring vision, focus and a wealth of experience to Target's transformation." (Malcolm) Food Retail Overview The U.S. retail food section is a complex network that together provides food for the whole nation. When food retail stores first began, they were mostly small, family-run stores. But now, as the world has advanced, food retail has grown into large stores, including a whole multitude of suppliers, distributors, and retailers. It has developed into hundreds of different companies in millions of different locations. The first phase of food retail came about in 1900 and lasted until around 1916. This early phase focused only on one aspect of food retailing: dry grocery items, which included canned goods and other non-perishable staples. Since the store sizes tended to be less than 1000 sq. ft., the butchers and produce vendors were separate entities, although they tended to cluster together for convenience’s sake. This era of grocery stores was partially credited to the establishment of the Great Atlantic & Pacific Tea Company (A&P), which allowed for easier transportation and expansion of staple goods. At the end of this era popped up the “Piggly Wiggly” food retail format, which introduced America to self-service shopping. These stores were equipped with a cafeteria-style eatery, the first of its kind to have a dry grocery items complemented with a cafeteria section. By 1920, chain grocery stores were rapidly expanding throughout the United States. Kroger, American Stores, and National Tea began to rise and be a prominent name in the food retail industry. A&P became national, operating over 10,000 stores by the end of the decade. That being said, these large chains still remained small and did not include meat or produce sections. By the late 1920’s, large chains were beginning to form through mergers. For example, the birth of Safeway came about in 1926 through a merger of smaller grocery companies, such as the Piggly Wiggly stores, Skaggs Cash stores, and several others. These mergers were used as a way to tax smaller stores out of existence, which is a key tactic for gaining market power today. The third phase of the food retail industry came about around 1930 due to a groundbreaking advancement; the creation of supermarkets. This was a new type of store structure that merged dry goods, fresh produce, and a meat department into the existing dry grocery section. The reason for this movement can be partially credited to Michael Cullen, who established America’s first supermarket called King Kullen in 1930. Michael Cullen was a former executive for Kroger and A&P. He took his knowledge from his previous positions and applied 5 them towards King Kullen, where he strategized and developed a key competitive advantage by offering lower prices than other grocery stores. This was possible due to the high-volume bulk of groceries they brought into the stores. By the late 1930’s, A&P started transitioning their thousands of small stores into big supermarkets, keeping in mind Cullen’s model.